Large companies offer comfort to stockholders in a sluggish economy. Many of them have the deep financial resources needed to weather a spending downturn and continue paying dividends. Unfortunately, many of them have also reached the limits of their growth potential.
Midsize companies can offer financial strength and room for expansion, but shop carefully. Through Monday, the S&P MidCap 400 index had returned 33% this year, or eight percentage points more than the large-company S&P 500 index. The midcaps now trade at 25 times 2009 earnings, vs. 19 for the large caps.
Below are three S&P MidCap 400 members that seem reasonably priced relative to their growth potential.
Minnesota-based Life Time Fitness (LTM) is an aggressive expander, spreading giant fitness centers complete with pools, basketball courts and daycare centers through America’s suburbs. The company struggled doubly over the past year. Housing bubbles popped in many of its markets, leading to rising unemployment and cancelled gym memberships. Also, tight credit conditions made it difficult to complete planned gym openings. Shares are still less than half their price of two years ago. That might be a good opportunity for investors. Life Time’s attrition rate and its sales at longstanding clubs seem likely to improve from here, analysts say. The company has just three club openings planned for this year, which should leave plenty of excess cash to be used for debt reduction. Shares are just 13 times earnings.
In its annual reports, Psychiatric Solutions (PSYS) used to say that 26% of Americans suffer from a diagnosable mental illness, citing a survey by the National Association of Psychiatric Health Systems. That’s hogwash, I wrote then and believe now. In its latest report, the company says simply that “millions of Americans of all ages experience psychiatric and substance abuse conditions every year.” That seems more like it. The difference is important because the psychiatric care industry is prone to getting carried away with itself and expanding irrationally, as it did during the mid-1990s, leading to a decade-long downturn. Supply seems more in keeping with demand today; employers are paying an increased part of the bill (under “behavioral health” plans); and big operators like Psychiatric Solutions look likely to profit from consolidating smaller centers. The company’s sales and profits are growing and its shares are just 10 times earnings.
When the Florida real estate boom of the 1920s popped, prices plunged, but newly built assets remained -- like most of the city of Miami. Similarly, America’s house-building mania of the past decade has left plenty of financial problems, but also plenty of new lawns. For that reason, Scotts Miracle-Gro (SMG), a maker of lawn and garden products, seems poised to prosper, even with a flood of new foreclosures expected next year. Home improvement retailers are already busily pushing lawn and garden products. Although granite countertops and stainless steel appliances aren’t moving like they used to, tomato patches still need fertilizing. Scotts shares are less than 13 times earnings.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."Try our powerful Select Stock Screener to discover investment opportunities that meet your criteria.
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